RBC test is comprehensive but it doesn't account for every type of insurance company risk

mec06e

The text states that it doesn't cover risks associated with business plans & strategy, management, internal controls, systems, reserve adequacy, or ability to access capital. (It struck me that internal controls should be covered by operational risk, so I'm not sure why the text says risks due to internal controls are not included in the RBC framework.)

I think a number of the risks listed above are already covered under the operational risk.
Operational risk charges including:
inadequacy or failure of internal systems
personnel
procedures or controls
external events
legal risk

wouldn't:
management be covered by personnel
systems by inadequacy or failure of internal systems

& reserve adequacy - why is that not already covered in R4 - reserve risk?

mec06e

I think I figured out the reserve adequacy - the R4 charge is just to capture the capital required for those reserves, it does not add in a charge for if the reserves are too low.

Staff - AC

Where do you find this said in the text?

mec06e

the first paragraph is straight from the RBC wiki. the rest are my comments.

Jaarndt

On page 245 of Odomirok. It is stated " Reserve risk is the risk that the company's recorded loss and loss adjustment expenese reserves will develop adversely, under the assumption that the current reserve balance is adequate." I just randomly remember this from my review yesterday. I don't believe an explanation is given anywhere in the text however. I am just going to memorize it for something RBC does not cover as it is one of the easiest for me to remember. IRIS 13 sort of tells you if current reserves are adequate (however, the still may not be even if the ratio is usual due to distortions like if premium is rapidly increasing.)

graham

The text refers to this twice:

[1] Overview

• The formula is not a comprehensive measure of every risk for an insurance company; rather it only considers those risks that are material to an insurance company. Further, risks associated with a company’s business plans and strategy, management, internal controls, systems, reserve adequacy and ability to access capital are not considered as these risks are difficult to quantify.

[2] Basic Operational Risk:

• Introduced in 2018,the basic operational risk charge considers the risk of financial loss resulting from operational events, such as the inadequacy or failure of internal systems, personnel, procedures or controls, as well as external events. This includes legal risk but excludes reputational risk arising from strategic decisions.

So it appears the text is giving contradictory information. In the Overview, it says internal controls are not considered, but in the section of Basic Operational Risk, it says failure of internal systems are considered. Unless "internal controls" are something different from "internal systems".

If you get a question about this on the exam, I would stick to the more obvious points:

• risk not considered: business plans and strategy, access to capital, reputational risk
• risks that are considered: legal risk, personnel, external events